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2 key L.A. officials warn against ending business tax

Saying the city cannot afford the loss of hundreds of millions of dollars in revenue, the mayor and council are urged to take a cautious approach on dropping the tax on gross receipts.

November 09, 2011|By John Hoeffel, Los Angeles Times
  • Los Angeles Mayor Antonio Villaraigosa calls for an end to the city's business tax on new car dealerships in announcing that Beverly Hills Porsche will be moving to L.A. next year.
Los Angeles Mayor Antonio Villaraigosa calls for an end to the city's… (Gary Friedman, Los Angeles…)

As pressure to end Los Angeles' business tax increases, top city officials warned Tuesday that City Hall cannot afford to lose the revenue when it faces a potential budget deficit of up to $250 million.

Business leaders have called for a phaseout of the city's tax on gross receipts, arguing the move would spur companies to expand and encourage others to move to L.A., eventually increasing revenue from other types of taxes. The city's taxes are among the highest in Los Angeles County.

But in a nine-page analysis, City Administrative Officer Miguel Santana and Chief Legislative Analyst Gerry Miller urged elected officials to take a cautious approach.

"Complete elimination of the business tax would be poor public policy," they wrote. "This would increase the tax burden on residents or result in decreased city services which would make Los Angeles a less desirable place to do business."

The report was released on a day when Mayor Antonio Villaraigosa, standing before a lineup of sleek, shiny Porsches, called for doing away with the business tax on new car dealerships. He was joined by council President Eric Garcetti and Councilman Mitch Englander, who plan to introduce such a proposal next week.

"For too long, L.A.'s business tax has driven auto dealers outside of the city limits," the mayor said. "When you can go to a nearby city like Glendale with no business tax, it doesn't make sense to stay in the city."

The mayor also announced that his administration helped persuade Beverly Hills Porsche to move to Los Angeles. It is the second dealership to leave Beverly Hills for Los Angeles, reversing an exodus of new car dealers from Los Angeles. Ninety-five dealerships have shut down in the last 25 years, the mayor's office said.

Villaraigosa and some council members, including Garcetti, have called for the business tax to be eliminated, saying that it has contributed to the city's reputation as a tough place to do business.

Neither was dissuaded by the cautionary analysis, although both agreed that any tax break should be balanced by cuts in services or added revenue.

"We must eliminate the broken, cumbersome and job-killing business tax once and for all," said Garcetti, who is running to replace Villaraigosa in 2013. "If we're going to get our economy back on track, it has to start here."

The tax on gross receipts is projected to raise $439 million this fiscal year, or about 10% of the general fund budget.

The city's Business Tax Advisory Committee has recommended cutting the business tax by 25% each year for four years. That proposal was based in part on a report from Charles Swenson, a USC accounting professor, who concluded that eliminating the tax might eventually bring in additional revenue by encouraging new economic activity.

Skeptical city officials sought a second analysis from economist Christopher Thornberg of Beacon Economics, a research and consulting firm. The idea that eliminating the business tax would increase overall tax revenues was "improbable at best," Thornberg concluded. Swenson was not available for comment Tuesday.

Thornberg advised city officials to focus on cutting red tape. He said he submitted a business proposal to the city that was rejected because it was half a page too long. "Really?" he said. "I mean they couldn't call us and say, 'Can you take two paragraphs out of this?' "

Santana and Miller also suggested that the mayor and council could focus on other ways to improve the city's business climate, including addressing the "sometimes unpredictable approval process" and "perceived hostility to 'big box' retailers and auto dealers."

"Part of our report was to raise attention to the fact that being business-friendly or what falls under that category doesn't begin or end with the business tax," Santana said.

Garcetti plans to take up the Santana and Miller report Wednesday at a meeting of the Jobs and Business Development Committee, which he heads.

The mayor, who owned a black Porsche 912 when he was in his 20s, relished his announcement that Beverly Hills Porsche would move its new car dealership to Santa Monica Boulevard in Westwood.

"When this move is done," the mayor said, "this Porsche facility will still be called Beverly Hills Porsche, but let me tell you, that's fine with me. I say give Beverly Hills the name, we'll happily take the sales tax."

Villaraigosa's office also noted that Beverly Hills BMW previously moved to Los Angeles' Miracle Mile. The dealership, which opened in February, had $145 million in sales last year, which would mean about $1.45 million in sales tax revenues for Los Angeles.

Beverly Hills Porsche, which will move next year, sold luxury cars worth $100 million last year, which could bring L.A. some $1 million in sales taxes.

Geoff Emery, president of Beverly Hills Porsche, said he was drawn mainly by a site just off the 405 Freeway. But he said the mayor's office worked to clear red tape.

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